The Federal Reserve announced it will lower the effective funds rate by 50 basis points (0.50%). This officially ends an aggressive rate hike campaign that started in 2022 to quell inflation that at one point reached over 9%.
Now that inflation is near the Fed’s 2% target, Fed Chair Jerome Powell announced the lowering of interest rates to stimulate economic activity from consumers and incentivize small businesses to borrow and grow.
Here’s what this decision means and how it affects the costs of getting a loan for your small business.
Key Points:
- Interest rates have dropped, making new fixed rate and existing adjustable rate loans cheaper
- Future rate cuts remain uncertain despite cooling inflation
- Refinancing could be a strategic move for business owners with existing debt
Federal Reserve Lowers Interest Rates for First Time in Two Years
In the first time since the country reopened post-pandemic, the Federal Reserve cut the federal funds rate. This rate is what banks charge each other to borrow money and sets the bar for the annual percentage rate (APR) on mortgage interest rates, credit cards, and business term loans. The Fed plays an important role in watching economic activity and decides where rates should be.
In 2020, the Federal Reserve lowered rates to nearly zero to stimulate spending and borrowing as the world grappled with economic uncertainty. During the COVID initiated shutdown, consumers could borrow money for their business, apply for a mortgage, and other loan products at low rates. This led to record-high borrowing levels. Two years later, inflation rose to historic levels not seen since the 1980’s, leading the Fed to raise interest rates. It hiked rates 11 times between March 2022 and July 2023, maintaining its current level for over a year.
The rate has kept lending costs high, putting even more pressure on the small business sector. In a Minneapolis Fed survey earlier this year, 63% of respondents said high interest rates have negatively impacted their business.
Now as the Fed lowers rates, the hope is that businesses will see cheaper borrowing costs from lenders as an opportunity to reinvest and expand their enterprises.
What To Do Now and What the Future Holds
The announcement has an immediate effect on small businesses today and for the foreseeable future. Rates on most new term loans have been on the decline this year, and this announcement will likely send them even lower.
Rohit Arora, CEO and Co-Founder of Biz2Credit, says rates may not drop as fast as they rose in recent years. “The ability [for the Fed] to cut rates significantly in the long term is going down,” he said. This is following the latest inflation numbers released on September 11, stating that inflation is cooling down as the core inflation number is at 3.2%. This may cause the Fed to be more cautious about cutting rates. Rohit says “it isn’t all good news for our small business owners just yet.”
But, there is still room to rejoice for small business owners looking for lending options. SBA variable rate loans are immediately cheaper. The lower the interest rate, the lower cost you will pay over the life of the loan.
Additionally, if you have outstanding loans, you may benefit from refinancing your current debt or consolidate your debt to lower your overall cost of capital. Rohit advises, “any time is a good time to consolidate debt”, but be sure to account for closing costs and fees from lenders. If you don’t have any outstanding debt, it could be worth considering using an SBA loan to grow or make the investments you’ve been thinking about.
Dan Schuessler, Co-Founder of MoneyGeek, says he plans on spending more now that interest rates have come down. “We are looking to ramp up online advertising spend which can require upfront cash for revenue that doesn’t come until later and lower interest rates help us make this investment and improve our return on investment,” he said.
As rates continue to change, you may be able to renegotiate terms with vendors. Your vendors likely face similar interest rate costs to you, which means that lower rates equate to lower borrowing costs and potentially lower monthly payments. Extended payment periods or reduced prices could be on the table, so be sure to check with them for better loan terms.
But before you apply for a loan for your small business to put a down payment on a real estate acquisition or have financial flexibility during the holiday season, consider factors like your need for working capital, personal credit score, business credit score, and roadmap for the short- and long-term.